Question/Update on my Situation

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soazfree
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Question/Update on my Situation

Post by soazfree » Sun Aug 12, 2018 6:42 pm

Rather than add on to my previous topics, I thought it best to start fresh and summarize previous info and provide updated info thoughts/questions;

Self 60 yrs pretty much retired
Spouse 62 yrs retired
Between the two if us we have about $3mil in tIRA "3 fund"
About $37K in an inherited IRA
Have about $120K cash/savings accounts
Mortgage about $50K remaining at 5.25%


New info:
This week I will receive about $250K from my mother's trust, I've also just started withdrawing from my inherited IRA for my monthly income.

1. I think I want to go ahead and complete the withdrawals from the Inherited IRA and just get it cleared from account, most likely. I'll use most of it up this year
2. I think it would be nice to go ahead and use $50K of the trust money to pay off my remaining mortgage. Pros/Cons?
3. Starting next year, I think I would want to use the taxable trust money to live on vs withdrawing from my tIRA. If I understand correctly, this money would not count as income on my 2019 tax return correct? Plan is to withdraw about $7800 before taxes, maybe less if mortgage is paid off. Pros/Cons?
4. Should I invest the $200K trust money since I plan to spend, or should I just put it into Ally Saving type savings account?

Thank you

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Duckie
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Re: Question/Update on my Situation

Post by Duckie » Sun Aug 12, 2018 6:58 pm

soazfree wrote:I think I want to go ahead and complete the withdrawals from the Inherited IRA and just get it cleared from account, most likely. I'll use most of it up this year
Sounds reasonable unless it puts you in a higher tax bracket. Does it?
I think it would be nice to go ahead and use $50K of the trust money to pay off my remaining mortgage. Pros/Cons?
At 5.25% yes, pay it off.
Starting next year, I think I would want to use the taxable trust money to live on vs withdrawing from my tIRA. If I understand correctly, this money would not count as income on my 2019 tax return correct?
The inherited amount would not count as taxable income, but any income it generates would.
Plan is to withdraw about $7800 before taxes, maybe less if mortgage is paid off. Pros/Cons?
Is that $7800 per year or per month?
Should I invest the $200K trust money since I plan to spend, or should I just put it into Ally Saving type savings account?
Depends on above answer.

Silk McCue
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Re: Question/Update on my Situation

Post by Silk McCue » Sun Aug 12, 2018 7:18 pm

With the significant income from the taxable (assuming $7800 monthly) most of that should be untaxed. This potentially allows large Roth conversions depending on what else is going on with your finances. In that case you might slow down/minimize the inherited IRA distributions to support the conversion.

Cheers

JBTX
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Re: Question/Update on my Situation

Post by JBTX » Sun Aug 12, 2018 8:43 pm

Agree with silk, if you don't have much other income you should evaluate if Roth conversions make sense.

soazfree
Posts: 57
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Re: Question/Update on my Situation

Post by soazfree » Sun Aug 12, 2018 9:06 pm

Duckie wrote:
Sun Aug 12, 2018 6:58 pm
soazfree wrote:I think I want to go ahead and complete the withdrawals from the Inherited IRA and just get it cleared from account, most likely. I'll use most of it up this year
Sounds reasonable unless it puts you in a higher tax bracket. Does it?
No it shouldn’t. What I didn’t mention is that this $7800/mon replaces my 5 year payout from my retirement pension.
I think it would be nice to go ahead and use $50K of the trust money to pay off my remaining mortgage. Pros/Cons?
At 5.25% yes, pay it off.
Agree, thanks.
Starting next year, I think I would want to use the taxable trust money to live on vs withdrawing from my tIRA. If I understand correctly, this money would not count as income on my 2019 tax return correct?
The inherited amount would not count as taxable income, but any income it generates would.
Yep, understand that.
Plan is to withdraw about $7800 before taxes, maybe less if mortgage is paid off. Pros/Cons?
Is that $7800 per year or per month?
Per month
Should I invest the $200K trust money since I plan to spend, or should I just put it into Ally Saving type savings account?
Depends on above answer.
Oh and Thanks! :happy
Last edited by soazfree on Sun Aug 12, 2018 9:13 pm, edited 1 time in total.

soazfree
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Re: Question/Update on my Situation

Post by soazfree » Sun Aug 12, 2018 9:12 pm

Silk McCue wrote:
Sun Aug 12, 2018 7:18 pm
With the significant income from the taxable (assuming $7800 monthly) most of that should be untaxed. This potentially allows large Roth conversions depending on what else is going on with your finances. In that case you might slow down/minimize the inherited IRA distributions to support the conversion.

Cheers
I need to better understand Roth conversions and how much to do etc. From what I’ve read, when you’re pulling from tax deferred you don’t want to take so much as to bump up another tax bracket etc. Are you saying to use some of the trust money to do a Roth or are you saying to use money from the IRAs? Thanks

Silk McCue
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Re: Question/Update on my Situation

Post by Silk McCue » Mon Aug 13, 2018 7:27 am

soazfree wrote:
Sun Aug 12, 2018 9:12 pm
Silk McCue wrote:
Sun Aug 12, 2018 7:18 pm
With the significant income from the taxable (assuming $7800 monthly) most of that should be untaxed. This potentially allows large Roth conversions depending on what else is going on with your finances. In that case you might slow down/minimize the inherited IRA distributions to support the conversion.

Cheers
I need to better understand Roth conversions and how much to do etc. From what I’ve read, when you’re pulling from tax deferred you don’t want to take so much as to bump up another tax bracket etc. Are you saying to use some of the trust money to do a Roth or are you saying to use money from the IRAs? Thanks
Minimizing taxable income maximizes the size of the Roth Conversions from funds in your Tax Deferred accounts. With $3m in tIRA your RMD's along with Social Security and other taxable income will drive your tax rate higher when you are both in your 70's. Each extra dollar of tIRA funds can/will cause a matching .85c to be taxable from Social Security. By performing Roth conversions you can potentially manage overall taxation without impacting the funds available for spending. If you need additional funds post age 70 you will be able to manage taxes by utilizing Roth funds that have hopefully appreciated without paying any additional tax when spending them.

The analysis of how much to convert to Roth needs to take into consideration your projected marginal rate (including the Social Security taxation). The situation will be exacerbated when one of you passes and the other is taxed at a Single rate rather than MFJ.

Cheers

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celia
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Re: Question/Update on my Situation

Post by celia » Thu Aug 16, 2018 10:11 pm

Do you realize that if you don't start withdrawing from the tIRA (for living expenses) or do Roth conversions, $3M at age 70.5 means you will have RMDs of $195K a year, which would put you in the 24% tax bracket, even if it was your only income? (Do you expect to have SS or other income sources start up by then?) Since the account will likely grow between now and then and the % needed to be withdrawn increases each year after that, your tax bracket will only grow over time. And after one of you dies, the survivor will still have to take the same RMDs but file as Single. The tax bracket for Singles is about half the size as for marrieds, so a Single person withdrawing $195K in RMDs will be in the 32% tax bracket.

Doing withdrawals or Roth conversions now will not only help lower future RMDs, but will also diversify the taxes for some of your assets. By this, I mean that assets in a Roth can grow tax-free and after the Roth has been open 5 years and the account owner is over 59.5, withdrawals will be tax-free. So in the future years, once your income reaches the top of your desired tax bracket, you can continue to spend by withdrawing from the Roth instead.

Since you will pay the same taxes whether you withdraw money to taxable or convert it, it is a no-brainer to me to convert. Use some of the money from your mom to live off of and pay the conversion taxes (by sending in estimated tax payments instead of withholding it from the conversion). After 2 or 3 years of converting to the top of the 24% tax bracket, I would re-evaluate the need to withdraw into your taxable account for living expenses, as your Roth money will not yet be ready to spend as it hasn't been in the account for 5 years.

As far as the mechanics of starting, I suggest you each convert $50K now (so you can start the 5-year clock). Then wait until later in the year. If the stock markets drop, you will be able to convert more shares for the same tax hit. I would wait until the market dropped 10%, then convert another $30-50K each. Then if it dropped another 15-20 %, convert some more. Finally, in December, calculate all your taxable income for the year (wages, interest, dividends, tIRA withdrawals/conversions [including from the Inherited IRA], 85% of your SS, etc) and see how much space you have left in the 24% tax bracket (the bracket ends at $315K, after you take a $24K MFJ deduction/exemption this year meaning you can have 315+24 = 339K in AGI income to still be in the 24% bracket). Be sure to convert the asset that is expected to grow the fastest (a stock fund) so that you can maximize your tax-free growth.
soazfree wrote:
Sun Aug 12, 2018 6:42 pm
Self 60 yrs pretty much retired
Spouse 62 yrs retired
Between the two if us we have about $3mil in tIRA "3 fund"
About $37K in an inherited IRA
Have about $120K cash/savings accounts
Mortgage about $50K remaining at 5.25%

New info:
This week I will receive about $250K from my mother's trust, I've also just started withdrawing from my inherited IRA for my monthly income.
1. I think I want to go ahead and complete the withdrawals from the Inherited IRA and just get it cleared from account, most likely. I'll use most of it up this year
Please don't do that as you can't convert money in an Inherited IRA and you need the space instead for your own Roth conversions. You will need to take RMDs from the Inherited IRA starting in the year after death, but you should just take the minimum required.
2. I think it would be nice to go ahead and use $50K of the trust money to pay off my remaining mortgage. Pros/Cons?
I think you should use most of the trust money for living expenses or paying taxes on the Roth for the first two years. In a few years, you can pay down (part of) the mortgage.
3. Starting next year, I think I would want to use the taxable trust money to live on vs withdrawing from my tIRA. If I understand correctly, this money would not count as income on my 2019 tax return correct? Plan is to withdraw about $7800 before taxes, maybe less if mortgage is paid off. Pros/Cons?
This is very good but should be started immediately instead to help facilitate the Roth conversions. The pro to using the money this way is that it allows you to convert more. The con is that your taxable money will shrink, but it can still be invested conservatively so it can grow without being too risky.
4. Should I invest the $200K trust money since I plan to spend, or should I just put it into Ally Saving type savings account?
It depends on what interest rate you can get for it.

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celia
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Location: SoCal

Re: Question/Update on my Situation

Post by celia » Thu Aug 16, 2018 10:49 pm

soazfree wrote:
Sun Aug 12, 2018 9:06 pm
Duckie wrote:
Sun Aug 12, 2018 6:58 pm
soazfree wrote:I think I want to go ahead and complete the withdrawals from the Inherited IRA and just get it cleared from account, most likely. I'll use most of it up this year
Sounds reasonable unless it puts you in a higher tax bracket. Does it?
No it shouldn’t. What I didn’t mention is that this $7800/mon replaces my 5 year payout from my retirement pension.
Please explain this pension. It wasn't mentioned at the top of the page.

I am suggesting (above) to leave as much space in the tax bracket for Roth conversions. If you have other kinds of taxable income (ie, IRA withdrawals), that means you can't convert as much.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

soazfree
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Re: Question/Update on my Situation

Post by soazfree » Thu Aug 16, 2018 11:31 pm

celia wrote:
Thu Aug 16, 2018 10:49 pm
soazfree wrote:
Sun Aug 12, 2018 9:06 pm
Duckie wrote:
Sun Aug 12, 2018 6:58 pm
soazfree wrote:I think I want to go ahead and complete the withdrawals from the Inherited IRA and just get it cleared from account, most likely. I'll use most of it up this year
Sounds reasonable unless it puts you in a higher tax bracket. Does it?
No it shouldn’t. What I didn’t mention is that this $7800/mon replaces my 5 year payout from my retirement pension.
Please explain this pension. It wasn't mentioned at the top of the page.

I am suggesting (above) to leave as much space in the tax bracket for Roth conversions. If you have other kinds of taxable income (ie, IRA withdrawals), that means you can't convert as much.
Celia, thank you so much for detailed replies. To further explain, I retired 5 years ago and had a large 5 year payout, that ended in July. This payout is what funded my tIRA and it is all tax deferred. Another update is that I did payoff my mortgage, so now my monthly expense requirement will be closer to $6800/mon instead of $7800.

The Wizard
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Re: Question/Update on my Situation

Post by The Wizard » Fri Aug 17, 2018 4:44 am

celia wrote:
Thu Aug 16, 2018 10:11 pm
Do you realize that if you don't start withdrawing from the tIRA (for living expenses) or do Roth conversions, $3M at age 70.5 means you will have RMDs of $195K a year...
This math is wrong
RMDs start at 3.65% and go up from there.
So a bit less than $120k the first years...
Attempted new signature...

The Wizard
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Re: Question/Update on my Situation

Post by The Wizard » Fri Aug 17, 2018 4:51 am

soazfree wrote:
Sun Aug 12, 2018 9:12 pm
Silk McCue wrote:
Sun Aug 12, 2018 7:18 pm
With the significant income from the taxable (assuming $7800 monthly) most of that should be untaxed. This potentially allows large Roth conversions depending on what else is going on with your finances. In that case you might slow down/minimize the inherited IRA distributions to support the conversion.

Cheers
I need to better understand Roth conversions and how much to do etc. From what I’ve read, when you’re pulling from tax deferred you don’t want to take so much as to bump up another tax bracket etc. Are you saying to use some of the trust money to do a Roth or are you saying to use money from the IRAs? Thanks
You are a textbook case for developing a spreadsheet that projects your AGI for the next 12+ years, including RMDs and SS (when they start) and Roth conversions prior to RMDs.

I wouldn't overdo Roth conversions (and the resulting taxes), but I'd do enough to get your AGI up close to what it will be a decade from now...
Last edited by The Wizard on Fri Aug 17, 2018 4:52 am, edited 1 time in total.
Attempted new signature...

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celia
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Re: Question/Update on my Situation

Post by celia » Fri Aug 17, 2018 4:52 am

The Wizard wrote:
Fri Aug 17, 2018 4:44 am
celia wrote:
Thu Aug 16, 2018 10:11 pm
Do you realize that if you don't start withdrawing from the tIRA (for living expenses) or do Roth conversions, $3M at age 70.5 means you will have RMDs of $195K a year...
This math is wrong
RMDs start at 3.65% and go up from there.
So a bit less than $120k the first years...
You're right. My dyslexia must have kicked in and 109500 ended up as 195000. I'll re-work the numbers for the OP later, unless someone beats me to it.

soazfree
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Re: Question/Update on my Situation

Post by soazfree » Fri Aug 17, 2018 11:21 am

Celia and Wizard, thank you both for your comments, I also wanted to respond to Celia's comments below
celia wrote:
Thu Aug 16, 2018 10:11 pm
Do you realize that if you don't start withdrawing from the tIRA (for living expenses) or do Roth conversions, $3M at age 70.5 means you will have RMDs of $195K a year, which would put you in the 24% tax bracket, even if it was your only income? (Do you expect to have SS or other income sources start up by then?) Since the account will likely grow between now and then and the % needed to be withdrawn increases each year after that, your tax bracket will only grow over time. And after one of you dies, the survivor will still have to take the same RMDs but file as Single. The tax bracket for Singles is about half the size as for marrieds, so a Single person withdrawing $195K in RMDs will be in the 32% tax bracket.
Just to be clear, my tIRA as of today is at ~$3M and that if I hadn't received the $250K from my mother's trust I would in fact be starting to withdraw approximately $6800/mon for living expenses. As far as what my tIRA value will be in 2029 when RMDs will start, who knows, hopefully more than it is now even with my withdrawals that I'll be doing after the trust money is gone. Yes I will have SS, but do not anticipate any other income sources


Doing withdrawals or Roth conversions now will not only help lower future RMDs, but will also diversify the taxes for some of your assets. By this, I mean that assets in a Roth can grow tax-free and after the Roth has been open 5 years and the account owner is over 59.5, withdrawals will be tax-free. So in the future years, once your income reaches the top of your desired tax bracket, you can continue to spend by withdrawing from the Roth instead.
As mentioned above, I will be doing withdrawals from the tIRA when my trust money is gone
Since you will pay the same taxes whether you withdraw money to taxable or convert it, it is a no-brainer to me to convert. Use some of the money from your mom to live off of and pay the conversion taxes (by sending in estimated tax payments instead of withholding it from the conversion). After 2 or 3 years of converting to the top of the 24% tax bracket, I would re-evaluate the need to withdraw into your taxable account for living expenses, as your Roth money will not yet be ready to spend as it hasn't been in the account for 5 years.
Yes I agree, I will convert funds from my tIRA to Roth. Although I know I could start this process this year, I think I would just like to wait until next year and start it clean. My plan is to use up the inherited IRA the rest of this year and get that account closed. Is there a reason you would want me to go into the 24% bracket as opposed to staying in the 22% other than it allows me to convert a larger amount to Roth? Also, I'm not sure what you mean when you say to "re-evaluate the need to withdraw into your taxable account for living expenses", I understand that the Roth conversions can't be touched for 5 years, are you saying to not use the trust money for living expenses? Finally, how do I make it so I pay estimated tax payments instead of having it withheld from the conversion? I guess this allows the whole conversion amount to transfer and assumes I have available cash for the tax payment?
As far as the mechanics of starting, I suggest you each convert $50K now (so you can start the 5-year clock). Then wait until later in the year. If the stock markets drop, you will be able to convert more shares for the same tax hit. I would wait until the market dropped 10%, then convert another $30-50K each. Then if it dropped another 15-20 %, convert some more. Finally, in December, calculate all your taxable income for the year (wages, interest, dividends, tIRA withdrawals/conversions [including from the Inherited IRA], 85% of your SS, etc) and see how much space you have left in the 24% tax bracket (the bracket ends at $315K, after you take a $24K MFJ deduction/exemption this year meaning you can have 315+24 = 339K in AGI income to still be in the 24% bracket). Be sure to convert the asset that is expected to grow the fastest (a stock fund) so that you can maximize your tax-free growth.
Yikes, I feel I'm drinking from the firehose now! :happy . Truthfully, I'm hoping to keep this as simple as possible, i.e. whatever I planned on using from the trust money for expenses per year, I would then convert the same amount from my tIRA to a Roth as early as possible in the year. I kinda get that it's probably preferred to get as much converted as soon as possible but is it ok to start this out "slow" until I get the hang of it? Also my wife's father is in his early nineties and she will probably inherit a low seven figure amount (I don't have any info on the types of money it may entail) so this will probably exacerbate our RMD situation. Heck maybe with that much money, taxes won't concern me as much?
soazfree wrote:
Sun Aug 12, 2018 6:42 pm
Self 60 yrs pretty much retired
Spouse 62 yrs retired
Between the two if us we have about $3mil in tIRA "3 fund"
About $37K in an inherited IRA
Have about $120K cash/savings accounts
Mortgage about $50K remaining at 5.25%

New info:
This week I will receive about $250K from my mother's trust, I've also just started withdrawing from my inherited IRA for my monthly income.
1. I think I want to go ahead and complete the withdrawals from the Inherited IRA and just get it cleared from account, most likely. I'll use most of it up this year
Please don't do that as you can't convert money in an Inherited IRA and you need the space instead for your own Roth conversions. You will need to take RMDs from the Inherited IRA starting in the year after death, but you should just take the minimum required.
Kinda conflicted here, I've already taken one withdrawal in July
2. I think it would be nice to go ahead and use $50K of the trust money to pay off my remaining mortgage. Pros/Cons?
I think you should use most of the trust money for living expenses or paying taxes on the Roth for the first two years. In a few years, you can pay down (part of) the mortgage.
Sorry not to be difficult but as mentioned in other post, we already paid the 5.25% loan off
3. Starting next year, I think I would want to use the taxable trust money to live on vs withdrawing from my tIRA. If I understand correctly, this money would not count as income on my 2019 tax return correct? Plan is to withdraw about $7800 before taxes, maybe less if mortgage is paid off. Pros/Cons?
This is very good but should be started immediately instead to help facilitate the Roth conversions. The pro to using the money this way is that it allows you to convert more. The con is that your taxable money will shrink, but it can still be invested conservatively so it can grow without being too risky.
4. Should I invest the $200K trust money since I plan to spend, or should I just put it into Ally Saving type savings account?
It depends on what interest rate you can get for it.

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celia
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Re: Question/Update on my Situation

Post by celia » Fri Aug 17, 2018 3:35 pm

soazfree, I won't have time to give this the full attention it needs for a few days, but want to give you something to think about in the meantime. This spreadsheet shows the growth of the tIRA at 5% and 8% if you DON'T do any Roth conversions:

Image

As long as the growth rate of the IRA is more than the % that needs to be withdrawn, the account value will grow and so will future RMDs. If you just take out living expenses each year, that is like a bucket of water sitting in the yard and you remove a few teaspoons of water. It will soon start raining and you need to remove cupfuls instead! If you look at the growth in the chart, wouldn't you like some of that growth to happen in the Roth instead?

You both really should start converting this year so that the 5-year clock will have been considered to have started retroactive to the beginning of the year: Jan. 1, 2018. If you wait to start until next year, your clock will start on Jan 1, 2019. You don't know what will happen 4.5 years from now, but wouldn't it be nice to have the flexibility of withdrawing from the Roth tax-free if you needed to? After the first 5-year clock has been met, no clocks apply anymore and all the money in your Roths could be withdrawn tax-free. And wouldn't it be nice to have some of money growing tax-free early on and get an extra year of growth in the Roth instead?

Yes, to get a handle on this, it may feel like you're drinking from a fire hose. But wouldn't you prefer that than drowning in taxes as your tax rate keeps increasing due to RMDs?

Here is one of my favorite threads where I showed everyone one method of calculating the optimal amount to convert. The tax rates have changed since then, but the method would still be the same.
viewtopic.php?f=1&t=194462&p=2962376

Although you have twice the money in your IRA, you have more years ahead of you to spread out the conversions compared to that OP.

Also note that the tax cuts passed last year are only temporary (until 2025), unless Congress votes to make them permanent before they expire. We currently have the lowest tax rates that we have seen in a long time. That and a market downturn are great environments to convert in!

soazfree
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Re: Question/Update on my Situation

Post by soazfree » Fri Aug 17, 2018 3:40 pm

Celia, thanks again for the info, I'll definitely look closely at it.
Also I'm thinking I'll just put the trust money into a new separate Vanguard account and just keep the money in the settlement account? Didn't want to hassle with an Ally type savings account. Yea/Nay?
Thanks again for everyone's help!

soazfree
Posts: 57
Joined: Fri Sep 04, 2015 8:49 pm

Re: Question/Update on my Situation

Post by soazfree » Tue Aug 21, 2018 8:55 pm

celia wrote:
Fri Aug 17, 2018 3:35 pm
soazfree, I won't have time to give this the full attention it needs for a few days, but want to give you something to think about in the meantime. This spreadsheet shows the growth of the tIRA at 5% and 8% if you DON'T do any Roth conversions:

Image

As long as the growth rate of the IRA is more than the % that needs to be withdrawn, the account value will grow and so will future RMDs. If you just take out living expenses each year, that is like a bucket of water sitting in the yard and you remove a few teaspoons of water. It will soon start raining and you need to remove cupfuls instead! If you look at the growth in the chart, wouldn't you like some of that growth to happen in the Roth instead?

You both really should start converting this year so that the 5-year clock will have been considered to have started retroactive to the beginning of the year: Jan. 1, 2018. If you wait to start until next year, your clock will start on Jan 1, 2019. You don't know what will happen 4.5 years from now, but wouldn't it be nice to have the flexibility of withdrawing from the Roth tax-free if you needed to? After the first 5-year clock has been met, no clocks apply anymore and all the money in your Roths could be withdrawn tax-free. And wouldn't it be nice to have some of money growing tax-free early on and get an extra year of growth in the Roth instead?

Yes, to get a handle on this, it may feel like you're drinking from a fire hose. But wouldn't you prefer that than drowning in taxes as your tax rate keeps increasing due to RMDs?

Here is one of my favorite threads where I showed everyone one method of calculating the optimal amount to convert. The tax rates have changed since then, but the method would still be the same.
viewtopic.php?f=1&t=194462&p=2962376

Although you have twice the money in your IRA, you have more years ahead of you to spread out the conversions compared to that OP.

Also note that the tax cuts passed last year are only temporary (until 2025), unless Congress votes to make them permanent before they expire. We currently have the lowest tax rates that we have seen in a long time. That and a market downturn are great environments to convert in!
Celia,

Thank you again for the info. With regard to the chart above and the drawdown of my tIRA, I just want to make sure you understand that in addition whatever amount I convert, I'll also be withdrawing about 2.5~3% for my expenses after the trust money is gone in about 2 years. And while it would be nice to achieve a 5to8% return, would it be "better" to assume a lower number?

Also thanks again to everyone who has responded, I'm learning more about this process each day and I appreciate your help!

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